CBO: Government faces fiscal crisis over borrowing

From msnbc.com's Tom CurryIn its mid-year long-term budget forecast, the Congressional Budget Office on Wednesday renewed its previous warnings that the government faces an increasing risk of a fiscal crisis due its ever-greater borrowing.

The report comes as Vice President Joe Biden and congressional budget negotiators try to reach an accord that would cut spending enough for Republicans to agree to an increase in the government’s borrowing limit.

August 2 is the date on which the Treasury Department says it will exhaust its means of managing cash to avoid hitting the current debt limit.

As it did in a report last January, the CBO said publicly held debt as a percentage of gross domestic product (GDP) would reach nearly 70 percent during the current fiscal year which ends on Sept. 30.

The CBO – in its “alternative fiscal scenario” -- predicted that if Congress does not raise taxes to their 2000 level and fails to impose Medicare spending cuts mandated by a 1997 law, by 2035 federal spending would account for more than a third of GDP, up from 24 percent of GDP this year.

Under that same scenario, by 2020 publicly held debt would reach nearly 90 percent of GDP.

CBO director Douglas Elmendorf said many budget analysts think the alternative fiscal scenario “is a more realistic picture of the nation’s underlying fiscal policies” than the “baseline” scenario which by law CBO must use to forecast spending and revenue.

The baseline, for example, assumes that current income tax rates will revert to their 2000 level at the end of 2012.

In Wednesday’s report, the CBO repeated earlier warnings about the risk of a sovereign debt crisis.

A rising level of debt, combined with an excess of spending over revenue “would increase the probability of a fiscal crisis for the United States,” the nonpartisan agency said, repeating a warning it made last July.

“In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates,” the CBO said, adding that “there is no way to predict with any confidence whether and when such a crisis might occur in the United States.”

But it said, “All else being equal, however, the larger the debt, the greater the risk of such a crisis.”

In his introduction to the report, Elmendorf identified health care costs and demographics as primary causes of the fiscal dilemma.

“Under current law, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security,” he said. “If revenues remained at their historical average share of gross domestic product (GDP), such spending growth would cause federal debt to grow to unsustainable levels.”